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Keynes, Lerner, and the Question of Public Debt

Tony Aspromourgos

In theory there is no difference between theory and practice. In practice there is.

—Attributed to L. P. (“Yogi”) Berra

The question of sustainable or desirable public debt trajectories has long been a motif of debate and controversy around John Maynard Keynes’s economics—and the financial crises and related economic developments since 2007 have naturally revived interest in the issue. The purpose of this essay is to explore Keynes’s own views on public debt by way of a con-sideration of his response to Abba Lerner’s Keynesian-inspired views on the issue. This particular strand of Keynes’s 1940s deliberations on debt policy offers particular insight into his thinking because he explicitly addressed Lerner’s (1943) radical or at least very relaxed views on public debt, endorsing them in some instances but also elsewhere repudiating them—particularly in a somewhat notorious public confrontation with Lerner at a 1943 meeting in Washington. Section 1 examines the latter

History of Political Economy 46:3 DOI 10.1215/00182702-2796209 Copyright 2014 by Duke University Press

Correspondence may be addressed to Tony Aspromourgos, School of Economics, University of Sydney, NSW 2006, Australia; e-mail: [email protected]. The author is indebted to Susan Howson, Anwar Shaikh, Isobel Yeap, and three anonymous referees, without thereby implicating them in the final product. Permission to quote from the papers of John Maynard Keynes (Unpublished writings of J. M. Keynes, copyright The Provost and Scholars of King’s College, Cambridge 2014; hereafter, JMK), and permission of Edward Elgar Publishing to quote from Colander and Landreth 1996, are gratefully acknowledged. Keynes’s Collected Writings (Moggridge et al. 1971–89) is cited as CW, with volume and page numbers.

History of Political Economy

Published by Duke University Press

410 History of Political Economy 46:3 (2014)

incident, with the following section assessing the wider relationship between Keynes and Lerner. Section 3 then provides a resolution of Keynes’s posi-tion on public debt trajectories vis-à-vis Lerner’s “functional finance” doctrine, by recourse also to supporting evidence from other Keynes com-mentaries on public debt in the 1930s and 1940s.

Robert Skidelsky (2000, 276) has asserted in passing that Keynes’s adverse reaction to Lerner’s doctrine was due to Keynes’s drawing a dis-tinction between “theories and policies,” citing two of Keynes’s unpub-lished letters (to J. H. G. Pierson and Fritz Machlup) that will be discussed below. Keynes’s rather nuanced view of the relation between theory and practice, more subtle than Lerner’s approach to policy, is indeed funda-mental to explaining their differences on debt. Here, we comprehensively examine Keynes’s engagement with Lerner’s public debt doctrine, bring-ing together all the extant accounts of the 1943 confrontation so as to provide as clear a picture as possible of that event. Then the wider intel-lectual relationship and exchanges between the two men from the mid-1930s forward are thoroughly detailed, thereby providing context for their disagreement on debt. By further also placing Keynes’s responses to Lerner in the larger context of other Keynes commentaries on public debt, we are able to give tangible substance to what the theory/practice distinc-tion is about, in specific relation to debt trajectories. Apart from the issues Keynes raises explicitly in his reactions to Lerner, this especially concerns policy management of the psychology of the debt markets.

Our analysis enables a refutation of the view that Keynes changed his mind concerning Lerner’s functional finance doctrine—on the basis of Keynes documents (some published, some unpublished) contemporane-ous with Keynes’s 1943 Washington confrontation with Lerner, and con-temporaneous with Keynes’s favorable oral comments on Lerner at a sub-sequent 1944 Washington meeting. It also enables a refutation of the view, taken by many commentators, that Lerner’s doctrine was a logical corol-lary of Keynes’s theory, a view that has led some to illegitimately con-clude that Keynes’s failure to embrace functional finance wholeheartedly was a failure to accept the logical implications of his own theory.

1. A Confrontation in Washington

In the set of interviews with some founding figures of American Keynes-ianism that makes up the contents of Colander and Landreth 1996, there are five distinct accounts of the 1943 confrontation—by Evsey Domar, Alvin Hansen, Lerner himself, Richard Musgrave, and Paul Samuelson



Aspromourgos / Keynes, Lerner, and Public Debt 411

1. It should be kept in mind that while these accounts are primary sources in the sense that they are by persons involved in the events, they are not primary insofar as they are not contem-poraneous with those events.

2. Lerner 1978, 67, essentially repeats this account but adds the strange claim that, in response to Lerner’s advocacy of public deficits to increase spending, Keynes “objected that this would only cause ‘even more [private] saving.’” (Compare this with Musgrave’s account below.) The Lerner interview printed in Colander and Landreth 1996 was conducted in 1972.

(although Samuelson was not present). None of them gives the precise date, and they conflict considerably in their detail. But they agree as to the spirit of the encounter: Keynes behaved badly in repudiating Lerner in a gratuitous and rather savage manner. There is even some dispute as to where the meeting took place. Hansen, sitting in on the Lerner interview, claims to have organized the meeting as “a dinner at one of the [Washing-ton] hotels,” with about forty economists in attendance; Lerner says it was “a seminar at the Federal Reserve.” Hansen says there was a subsequent seminar at the Fed at which Keynes spoke; and while there is also no date provided for that meeting, it must have been no earlier than 1944, since Hansen has Keynes very warmly commending Lerner and his 1944 Eco-nomics of Control (Colander and Landreth 1996, 106–8). Keynes’s response to that book is considered in sections 2 and 3. The Fritz Machlup letter discussed below confirms Hansen’s recollection of two seminars, as do the accounts by Domar and Samuelson. That there were two Washing-ton meetings at which Keynes spoke might explain some of the discrepan-cies of detail between the five retrospective accounts of the confrontation with Lerner, those details being recalled decades after the event.1

Notwithstanding Hansen’s recollection, in his own account Lerner per-sists in insisting that the 1943 meeting was at the Fed; he was standing “in the middle of the back of the hall” with Domar beside him; and Keynes’s subject was the danger of a postwar slump. Lerner recalls his exchange with Keynes as follows:

I asked why we should have to worry about that: if you give people enough money they will spend more and then there will be enough spending; there’s no need for any depression if you’re prepared to give them more money. So he asked where would you get the extra money and I didn’t say, “the printing press.” I said you could borrow it. He said, you mean the national debt will keep on growing, and I said yes. “What would happen?” I said—nothing. So we talked for a moment and he said: “No, that’s humbug. . . . The national debt can’t keep on growing.” . . . That was the end of his discussion. (Colander and Lan-dreth 1996, 108–9)2




3. It is unclear how this figure (given on page 108 of Colander and Landreth 1996) is to be reconciled with Hansen’s claim, just a page earlier, that “about 40” were in attendance—per-haps a tacit correction.

Lerner’s denial that he referred to printing money is a response to Han-sen’s recollection of the exchange, in the same interview: “In the discus-sion you [Lerner] raised the question . . . ‘Mr. Keynes, why don’t we for-get about all this business of fiscal policy, public debt and all those kinds, and have some printing presses?’ To which Keynes made this reply: ‘It’s the art of statesmanship to tell lies, but they must be plausible lies.’ This was supposed to squelch you for the evening and, as a matter of fact, you said nothing more.” Hansen also says that Lerner was “sitting in the cor-ner of the room” and that the meeting involved “a small group of about twelve.”3 Lerner says there were “about a hundred people” present and “no sitting at a table”; that is to say, reiterating his denial that it was a din-ner meeting (107–8).

Domar had moved to Washington in February 1943 to work as Han-sen’s assistant, Hansen being then “Special Adviser” (Domar’s phrase) to the Federal Reserve Board. Domar claims that it was he who suggested to Hansen to organize a seminar series at the Fed. Because Keynes happened to be in Washington at the time, he became the series’ first speaker. Domar does not say where the meeting was held or how many were in attendance; but he speaks of limiting it to “some thirty persons” and that in the end, “only Federal Reserve economists, plus a few outsiders” were invited, although “several others crashed the gate”:

I don’t recall what Keynes talked about. It was not a formal presenta-tion. But I do remember . . . his nasty comments on functional finance. Someone asked Keynes about it. In response he said that you could fool all of the people some of the time, etc., but you could not fool all of the people all of the time. He probably used the word “humbug” or some-thing equally strong. I sat next to Lerner at the end of the table (with Keynes and Hansen at the head) and recall very vividly how red was his face. No one defended him. (184–85)

Note that Domar does not have Keynes’s repudiation of functional finance as a direct response to Lerner himself (but nor does Domar contradict that recollection by others), while his account supports Hansen’s claim of a relatively small attendance (“the” table), whether or not it was a dinner.

Samuelson’s account conforms with Hansen’s, which fits with Samuel-son’s recollection that he heard about it “at the time—probably from Han-




sen.” Keynes, Samuelson recalls, gave “two famous Federal Reserve sem-inars”; at the first he was “kind of reactionary” and “jumped on” Lerner in relation to functional finance:

One of the things he said . . . was, “Plato said, ‘The art of politics is the art of telling plausible lies.’ But you know, Abba, those lies have got to be plausible,” implying that Lerner’s weren’t. He must have felt . . . that Lerner had overdone it. . . . But anyway, in the meantime, Lerner’s The Economics of Control came out . . . and in the second seminar he made redress and went out of his way to say nice things. (177)

Musgrave worked at the Fed in Washington during the 1940s. Accord-ing to his recollection, Keynes’s topic was “problems of war finance and international financial arrangements in the post-war world,” and it was Lerner who proposed that the postwar problem would be “over-saving and unemployment” (as against Hansen’s recollection):

Keynes harshly rejected the risk of post-war stagnation, holding that because of Social Security there would be a large reduction in private saving and so that would be no problem. And then he practically said no sensible person would still be a Keynesian in such a period. I remem-ber feeling sorry for Abba’s being left in the cold.

[Interviewer:] It’s interesting. Alvin Hansen has a totally different memory of an encounter of Keynes and Lerner; Hansen remembers Abba saying at one point, “Why don’t you forget all this stuff like deficit finance and everything, and just print money?” After he looked around and saw that no reporters were there, Keynes said, “It’s the art of statesmanship to tell lies, but they must be plausible lies.” (202)

One further voice may be added to the testimony of these five. In a let-ter to Keynes dated October 24, 1944, Machlup notes Keynes’s comments on Lerner’s “idea of ‘functional finance’ . . . last year, at the Seminar in the Statler Hotel,” involving “pretty strong words,” and that “we all inter-preted as being rather disparaging,” adding, “Lerner and his friends were disappointed and Lerner’s opponents rather elated” (my italics). Machlup contrasts this with Keynes’s “complimentary remarks” on the same sub-ject “at the Seminar meeting in the Federal Reserve Board the other day.” Machlup also makes the point that “your [1943] comments have received wide circulation; whenever functional finance is now brought up for dis-cussion everyone hastens to add that Lord Keynes has disapproved of it”




(JMK/CO/4/274; Colander [1984, 1574], incidentally, incorrectly places the 1944 Keynes Washington seminar in 1945). The motive for Machlup’s letter was to invite Keynes to contribute to a symposium on functional finance, to include Lerner, for publication in the American Economic Review, Machlup being then the “Acting Managing Editor” (Machlup’s own designation) of the journal. Keynes declined, blaming his overwhelm-ing war-related obligations.

2. The Wider Keynes-Lerner Relationship

Lerner was born in Bessarabia in 1903 but moved to England in 1906. After first working as a printer (Colander and Landreth 1996, 129), he graduated from the London School of Economics (LSE) with a BSc in economics in 1932 (and a PhD in 1943). He was also one of the young founders of the Review of Economic Studies in 1933 (Colander and Lan-dreth 1996, 85–86; Forstater 2006, 558–59). Lerner was evidently a bril-liant student. Raymond Goldsmith, also at LSE in the mid-1930s, com-ments that “he was winning all the prizes” (confirmed by Forstater 2006, 558–59) and “was recognized as a coming man” (Colander and Landreth 1996, 129). Lerner came into the orbit of Keynes’s circle in 1933, Joan Robinson having been the principal agent of the initial intellectual engage-ment. A weekend-long meeting was held in the town of Bishop’s Stortford (because halfway between London and Cambridge), attended by a group from LSE and some of Keynes’s circle from Cambridge (Colander and Landreth 1996, 88–89). There was also a somewhat similar kind of meet-ing, probably in 1933 or 1934, at Bertorelli’s Restaurant in Soho (London; not far from LSE), devoted to Friedrich von Hayek versus Keynes, with Lorie Tarshis and Robert Bryce from Cambridge representing the latter, and an LSE group including Lerner; but this meeting more or less failed, partly due to a drunken right-wing rant by Paul Sweezy (Colander and Landreth 1996, 58–59; account by Tarshis). Initially resistant to what he was hearing from the Cambridge people, during the course of 1934–35 Lerner came around to a Keynesian position, engagement with Tarshis evidently being particularly instrumental. Lerner was intending to spend six months at Manchester, with a view to developing his empirical and statistical skills, but ended up spending the period in Cambridge, during which time he attended Keynes’s lectures and participated in his Political Economy Club seminars (Colander and Landreth 1996, 59, 89–93). Imme-




4. In a November 13, 1936, letter to Keynes, Robinson comments, “Don’t you think Lerner is a credit to me? . . . His [1936] article . . . will be useful for our young men” (CW 14:148). In an editorial footnote attached to this letter, reference is made to discussions between some of the Cambridge Keynesians and Lerner and others from LSE, “on the neutral ground of Newport (Essex)”—apparently a similar but further meeting to that held at Bishop’s Stortford, which is a few kilometers south of Newport.

5. But astonishingly, there is a March 4, 1920, letter from Lerner to Keynes concerning revi-sion of the Versailles Treaty, stimulated by Keynes’s exchanges on the issue with Herbert Ste-phen in the Times (JMK/EC/2/4/7-8). There is no extant reply by Keynes. Lerner was then an evidently precocious sixteen-year-old—e.g., informing Keynes of what his position would be if he were a “real” socialist (Lerner’s double underline). The letter is remarkably sophisticated—so much so that one may wonder whether it was entirely authored by the young Lerner alone.

diately subsequent to the General Theory, Lerner (1936, 1938a, 1938b) published three articles in support of Keynes’s new economics.4

The first correspondence between Keynes and Lerner, so far as we are aware, is an exchange of letters dated June 15 and 16, 1936.5 Lerner sent Keynes a copy of his 1936 article, intended as a summary statement of Keynes’s theory, seeking a response as to whether it was “a corruption of your theory or whether I have really been successful in getting it across.” Keynes opens his answering letter by describing the article as “splendid,” “accurate,” and “convincing,” but proceeds in some detail to emphasize two aspects of his theory “which you scarcely touch on”: “the breaking away from . . . Say’s Law,” or, equivalently, “the re-discovery of there being a problem of . . . effective demand”; and “the discovery that, as income increases, the gap between income and consumption may be expected to widen . . . [and hence] the essential interdependence of the amount of income and the amount of investment” (CW 29:214–15). One may wonder whether Keynes’s opening sentiments in this letter are entirely consistent with his subsequent comments.

A year prior to this, on May 2, 1935, Keynes had provided a written appraisal of Lerner in response to a request from Lionel Robbins, in the context of Lerner’s being considered for an LSE appointment. Keynes was asked because of Lerner’s stay in Cambridge, and has much to say of a very positive character, having “seen a good deal of Lerner during his time in Cambridge”: “I have . . . much respect and affection for him”; “very learned”; “an acute and subtle mind”; “at Cambridge, . . . playing quite a part in the common intellectual life . . . [and] generally liked”; “integrity and high disinterestedness of . . . character.” But there is a com-ment concerning Lerner’s intellectual sensibility that is relevant to a reso-lution of their later tensions over public debt: “It is not easy to get him to




6. The final-volume comprehensive index for CW (30:337) incorrectly cites Lerner refer-ences at CW 19:254, 268, 277. It should be vol. 29. The page 277 reference is a comment on Lerner by E. S. Shaw.

take a broad view of a problem and he is apt to lack judgment and intu-ition, so that, if there is any fault in his logic, there is nothing to prevent it from leading him to preposterous conclusions” (Colander and Landreth 1996, 113–15; these two letters are not reproduced in CW).

Less than three months after the June 1936 Lerner/Keynes letters there is a rather sharp response by Keynes in the New Statesman and Nation to a September 5 letter to the paper by Lerner and Sweezy (1936) criticizing some of Keynes’s earlier political commentary, Sweezy having evidently turned sharply left since the Soho meeting mentioned above (Keynes’s reply, published September 12, is in CW 28:56–57). One may doubt how much of the Marxist sentiment of the Lerner/Sweezy letter was whole-heartedly endorsed by Lerner. As the following comment in relation to the 1930s socialist calculation debate attests, he was, at that time, a non-Marxist socialist: “I first got interested in economics as a socialist. I thought economics should have helped solve the problem of distribution, and I was puzzled by some of the remarks made by Marxists. The ideas attracted me in some ways, but I found them quite unintelligible in other ways” (Colander and Landreth 1996, 98).

In 1938, in his role as editor of the Economic Journal, Keynes cor-responded with Gottfried Haberler over Richard Kahn’s (1937) review of Haberler’s Prosperity and Depression (1937). In the course of this cor-respondence (and earlier), Haberler mentions Lerner in relation to the issues between Haberler and the Keynesians, and in this context, Keynes endorses Lerner 1938a: “[His] analysis of the different theories of the rate of interest . . . expresses views which I share” (CW 29:254, 268, 271; Keynes’s letter, April 3).6 There is also some extant prepublication corre-spondence between Lerner and Keynes about the Lerner article (JMK/EJ/1/4/196-200; JMK/EJ/1/5/80-84). In two April 1938 letters to the American economist E. S. Shaw, Keynes again commends the forthcom-ing Lerner article (CW 29:280–82). Keynes (1938, 322n) also cites it in support of his rejoinder to a note by Dennis Robertson in the same issue of the Economic Journal (CW 14:233n).

The next Keynes/Lerner correspondence, so far as we are aware, comes three years later. During Keynes’s 1941 visit to the United States, Lerner wrote to him from Kansas City, including the following comment: “I keep




7. Whatever its precise date, the Keynes/Lerner Washington confrontation was definitely after this letter—in fact, in September or October. Keynes made one visit to the United States in 1943, spent entirely in Washington except for a few days in New York City. He departed from Glasgow on September 3 and arrived back in London on October 28 or 29 (Skidelsky 2000, 306, 308, 324, 571; Moggridge 1992, 731, suggests the later return date). James Meade gives a detailed account of the visit but makes no reference to Lerner, or to the 1943 Fed seminar at all (Howson and Moggridge 1990b, 92–155). Nor does Moggridge (1992) at all refer to the confrontation; Skidelsky (2000, 532n36) mentions it in passing. There is actually a typescript of Lerner 1943 in the Keynes archive (JMK/L/43/144-59); but a word-by-word comparison with the published text provides compelling evidence that the typescript was copied from the published text.

on hearing reports that you think there is immediate danger of inflation in [the] USA, and wonder on what these can be based” (JMK/W/8/4; May 14). Replying on May 23, Keynes summarizes discussions he had the pre-vious night with “a gathering of youngish economists” at the home of Laughlin Currie. The Americans judged that “the risks [of inflation] were small, unemployment would continue, in spite of the defence programme, on a large scale, and that even the present spending programme would not produce anything like full employment.” Keynes was somewhat skeptical and commented to Lerner, “I wish you had been there last night. I should have been much helped to have had your opinion” (CW 23:181–82).

Subsequent to this, the next Keynes reference to Lerner is in the first of two documents in which Keynes at least appears to offer a strikingly dif-ferent judgment of Lerner’s functional finance doctrine, to that implied by Keynes’s reaction in the 1943 Washington meeting. At the conclusion of an important April 25, 1943, memorandum to James Meade, concerning postwar employment policy, Keynes comments on the just published Lerner 1943:

I recently read an interesting article by Lerner on deficit budgeting, in which he shows that, in fact, this does not mean an infinite increase in the national debt, since in course of time the interest on the previous debt takes the place of the new debt which would otherwise be required. (He, of course, is thinking of a chronic deficiency of purchasing power rather than an intermittent one.) His argument is impeccable. But, heaven help anyone who tries to put it across the plain man at this stage of the evolution of our ideas. (CW 27:320; my italics)7

Domar is therefore certainly wrong when, asked why he thinks Keynes reacted to Lerner as he did in the 1943 Washington meeting, he com-ments, “Taking into account that a year later he praised functional finance




to the skies, I have to conclude that Keynes either had not read it and didn’t want to admit it, or that he had read it and had not understood it” (Colan-der and Landreth 1996, 185). The significance of these comments by Keynes will be addressed in the following section.

Also in 1943, while Keynes was in the United States, and hence around the time of the confrontation with Lerner, there is an exchange of letters with J. H. G. Pierson of the US Bureau of Labor Statistics in Washington, in which Keynes’s attitude toward functional finance is more negative, although these negative sentiments may partly be read as an elaboration of the last sentence of his comments to Meade six months earlier. Pierson had sent a brief note to Keynes with a paper Pierson hoped could be the subject of discussion with Keynes (JMK/L/43/123; October 17). His Octo-ber 22 response, as it pertains to Lerner’s doctrine, is important enough to quote at some length:

Substantially, what you are proposing seems to me to be a variant of Lerner’s functional finance. Now the theoretical idea lying behind Lerner’s proposals seems to me very brilliant, and of great value for clarifying one’s thought and indicating at any rate a theoretical means of obtaining [full-employment] equilibrium in a way which does not involve any obvious consequential social changes.

The worst of this policy is, however, that it runs directly contrary to men’s natural instincts as they at present are about what is sensible. It would be extremely difficult to put over. Moreover, the real difficul-ties actually facing the plan do not seem to me to have been thoroughly faced or worked out.

My criticism of your paper is that it by no means faces the music. You do not even make it clear that you reach your results by an ever-mounting Government deficit (this is not sufficiently answered by Ler-ner’s point that the necessary size of the national debt approaches a maximum asymptotically). This involves a progressive change in the distribution of incomes between savers and non-savers on a consider-ably greater scale than would take place otherwise.

I am quite of the opinion that these ideas have a part to play. But to give them this sole prominence is, I think, a mistake, and involves you in facing uninstructed public opinion at a great disadvantage. (JMK/L/43/124-126; my italics)

These comments will be addressed further in the following section. But it may be noted here that the first sentence of the second quoted para-




graph, and the very last sentence, appeal to a kind of “false conscious-ness” as a potential obstacle to Lerner’s policy. This is an objection of a different and lesser order than any intrinsic or objective problems with the policy, since false beliefs are capable of being eliminated; and if there are no intrinsic problems with the policy, objection to it should evaporate with the dissipation of false economic opinion. However, in the last sentence of the second paragraph, Keynes refers also to further “real difficulties.”

The second of the two documents in which Keynes offers a relatively positive judgment of Lerner’s doctrine is a letter to Lerner himself, merely dated “At sea Septr. 1944,” having been written while Keynes was travel-ing to the United States. It confirms the testimony of others as to Keynes’s praise of Lerner in 1944. The sea journey provided him with the opportu-nity to read Lerner 1944a, and the letter is entirely devoted to comment on it. Here is the pertinent passage:

I have marked with particular satisfaction and profit three pairs of chapters—chap 20 and 21, chap 24 [the chapter on functional finance] and 25, and chap 28 and 29. Here is the kernel of yourself. It is very original and grand stuff. I shall have to try when I get back to hold a seminar for the heads of the Treasury on Functional Finance. It will be very hard going—I think I shall ask them to let me hold a seminar of their sons instead, agreeing beforehand that, if I can convince the boys, they will take it from me that it is so! (Colander and Landreth 1996, 116–17; this letter is not reproduced in CW)

Notice the allusion here also to a problem of false consciousness. In rela-tion to convincing the Treasury, eight months later, in May 1945, Meade comments in his diary on the deliberations of an interdepartmental com-mittee meeting on postwar debt management, noting, “Keynes attacked our last paper, saying that it should have dealt with Lerner’s ‘functional finance’” (Howson and Moggridge 1990a, 81–82; cf. 21n; also CW 27:404–5)—further evidence that Keynes wanted functional finance taken seriously in government policy deliberations.

Our final piece of testimony is the October 1944 exchange of letters between Machlup and Keynes, already discussed somewhat in the previ-ous section. Keynes’s reply to Machlup goes to the issue of theory versus practice, an issue central to the resolution of Keynes’s view on public debt and his differences with Lerner, offered in our following section. It will be recalled from the previous section that in his letter to Keynes, Machlup had drawn attention to the apparent contrast between Keynes’s “disparag-




8. Not facing the difficulties is language Keynes also used in the letter to Pierson, at about the time of the Washington confrontation, indicating a consistency of view on Keynes’s part from 1943 to 1944. He appears to have used the same language in communication with Rob-bins. Keynes had evidently sent Robbins a copy of the typescript version of Lerner 1943 and in a short note to Keynes dated December 7, 1943, Robbins comments, “I share your view that Lerner does not really face all the difficulties” (JMK/L/43/143).

ing” 1943 comments on functional finance and his “complimentary” 1944 remarks. In his October 25 reply Keynes responds as follows:

As compared with last year, I should claim, though perhaps Lerner would not agree with me, that it is not I who have changed my mind. My very warm and sincere eulogy [in the 1944 Washington seminar] was based on his new book, which I think excellent. There was also a contribution to the Press, I think in the New York Times, which I thought most well judging. On the other hand, some of the things he was saying a year ago seemed to me to be spoiling a splendid intellec-tual idea by pretending it can be crudely put into force, and then refus-ing to look in the face all the practical difficulties.8 I thought that very naughty. But the Press article I saw was most reasonable, and his book is, of course, on the highest possible academic level.

I should still say, however, that functional finance is an idea and not a policy; part of one’s apparatus of thought but not, except highly diluted under considerable clothing of qualification, an apparatus of action. Economists have to try to be very careful, I think, to distin-guish the two. (JMK/CO/4/275; my italics)

With regard to the possible Lerner contribution to the New York Times that Keynes mentions, he evidently has in mind Lerner 1944b, this letter being Lerner’s only contribution to the New York Times in the year from October 1943 forward, and published just a few weeks prior to Keynes’s letter to Machlup. Responding to two earlier letters on the issue, Lerner does indeed express a degree of reserve, in terms of “the real limits to deficit financing,” noting three factors: structural unemployment; possible inflationary pressures from spending out of public debt interest income (that cannot easily be offset by higher taxation); and adverse impacts on the distribution of income and wealth from the growth of public debt. He concludes the letter with a sentiment that Keynes probably found attrac-tively cautious: “It is only a consideration of real effects, and not the rep-etition of ancient shibboleths which can prevent deficit financing in the future from being applied recklessly with possible harm to our economy and its free institutions.”




More generally, Keynes’s response to Machlup confirms what would in any case be fairly obvious: Keynes’s favorable comments on Lerner’s doc-trine at the 1944 seminar were substantially a result of Keynes’s reading The Economics of Control a month or so prior to that meeting, a fact dis-closed in his September 1944 letter to Lerner. One may recall here also the testimony of Hansen, Samuelson, and Domar, noted earlier, indicat-ing perceptions of a change of mind on Keynes’s part, as Machlup’s letter implies. But Machlup in his letter also sees a theory/practice distinction as perhaps reconciling Keynes’s 1943 and 1944 comments (as indeed is con-firmed by Keynes’s response), Machlup commenting, “I know, of course, that you distinguish between the significance of the ideas as a practical program and as a pedagogic device” (JMK/CO/4/274). Lerner himself affirms the change-of-mind thesis, recollecting that “a month” after the 1943 meeting there was “another meeting” at which “Keynes withdrew his criticisms of me and said he thought I was right after all” (Colander and Landreth 1996, 109; also Lerner 1952, 118). Lerner indicates here (Colander and Landreth 1996, 109) that he was not present at this sup-posed second meeting and heard of Keynes’s comments secondhand. But it is obviously the meeting a year later that this is about.

3. Resolution: Theory and Debt-Management Practice

The essence of Lerner’s 1943 functional finance doctrine may be summa-rized as follows. Government should manage aggregate expenditure so as to keep it at the level required for full employment, by varying public expenditure and taxation. If such pursuit of full employment leads to pub-lic sector deficits, met by issuing debt or printing money, there is nothing “especially . . . bad about this”; government “should merely concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation.” The only essential pur-pose of taxation is to reduce private expenditures, since government expenditure can be financed “much more easily by printing money.” Gov-ernment debt should be issued “only if it is desirable that the public should have less money and more government bonds,” the rationale for this pos-sibility being that “otherwise the rate of interest would be reduced too low,” thereby inducing too high private investment expenditure (Lerner 1943, 39–40). Note therefore that Lerner takes for granted that excess pri-vate sector, outside-money holdings place downward pressure on interest rates, which can be alleviated by issuing additional public debt to drain




9. Keynes refers to this in his above-quoted letter to Meade, when he comments that Lerner’s argument shows that “deficit budgeting . . . does not mean an infinite increase in the national debt,” although Keynes focuses on an income effect rather than the wealth effect. The impact of expenditure out of interest income from public debt is addressed particularly on page 47 of Lerner 1943.

this excess liquidity from the private sector (likewise Lerner 1944a, 309–13). The analysis also tacitly assumes that excess-demand inflation and involuntary unemployment cannot coexist.

Hence, “Functional Finance rejects completely . . . the principle of try-ing to balance the budget over a solar year or any other arbitrary period.” The only purpose of issuing and extinguishing debt (and the associated variations in private sector outside-money holdings) is “to achieve the rate of interest which results in the most desirable level of [private] investment.” This might result in “a continually increasing national debt,” but that is “no danger to society, no matter what unimagined heights the national debt might reach.” In any case, Lerner adds, functional finance generates “an automatic tendency for the budget to be balanced in the long run,” although he regards this as “much less important.” This proposition is based on a number of arguments for how functional finance will increase private spending, via full-employment policy generating higher private invest-ment, and the growth of private holdings of outside money and govern-ment bonds inducing higher private expenditure (as well as higher tax rev-enues from “higher incomes and inheritances”). The rise in private spending from rising public debt is attributed to a positive wealth effect—no Ricardian equivalence here—so that eventually, “private spending is enough to provide the total spending needed for full employment,” “deficit financing” becomes unnecessary, “and the national debt automatically stops growing” (Lerner 1943, 41–43, 47–49).9 The analysis is entirely in a static framework, and the conclusion on automatic stabilization of the absolute level of debt tacitly assumes something akin to a zero balanced-budget multiplier. Lerner (1943, 49) concludes by acknowledging that the resulting “equilibrium level of debt” might be very high. If the resulting distribution of private wealth is regarded as unacceptable, by “taxing the rich . . . the debt can be reduced to any desired level,” without much impact on private expenditure (cf. Lerner 1944a, 319–22). No political constraints on these policies are entertained.

The parallel functional finance chapter of Lerner 1944a (pages 302–22) does not tightly follow the 1943 text, but the substantive argument is essen-tially the same. The following key differences vis-à-vis the 1943 argument



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10. We do not consider any development of Lerner’s position after Keynes’s death. There was some; but nothing that compromises our argument. See, in particular, Lerner 1948, 264–68; 1951, 274–85, 310–12; and 1961; compare the last with Keynes 1933, 186–87.

may be noted. Throughout the chapter, conventional views as to “sound finance”—“exceptionally powerful and firmly established prejudices”—are more systematically rebutted or otherwise addressed. In this context, the problem of false consciousness—in terms of private business confidence being adversely affected by budget deficits—is taken seriously, although Lerner concludes that this is “best met by a determined maintenance of adequate demand” via functional finance (319–21). Foreign-held public debt is allowed for, and it is conceded that conventional debt wisdom is “valid” with respect to it (305–6, 313–14; also in Lerner 1941a, 262; 1943, 43, alludes to foreign-held debt). Possible influences of taxation on interest rates, and of debt issuance directly on private expenditure (not merely via interest rate changes), are acknowledged (Lerner 1944a, 311–12). A role for public investment is considered, and here some political obstacles to good policy are mentioned (315–16; and further “political . . . restrictions” at 316–17). The functional finance doctrine is restated in the language of mar-ginal social benefits and costs (316–18). A strange omission is that, while the notion of “a long run tendency for the budget to balance itself” is asserted (as it also is in Lerner 1941b, 7–8, 10), no argument, as was pre-sented in 1943, is offered (318).10

Relative to the 1943 version, some of the differences in Lerner’s 1944 statement of his doctrine (and his 1944 letter to the New York Times) were no doubt regarded by Keynes as better facing the false consciousness and real difficulties with application of the doctrine to practice. But contrary to Lerner (Colander and Landreth 1996, 109; Lerner 1952, 118), there was no change of mind on Keynes’s part. He was not “initially hostile and shocked” by functional finance and only “later felt moved to retract,” as Tibor Sci-tovsky (1984, 1559) asserts. Keynes’s claim of no change of mind in the letter to Machlup is credible. Keynes endorses functional finance before, at about the same time as, and after, the 1943 Washington confrontation—in his letters to Meade (April 25, 1943), Pierson (October 22, 1943), and Machlup (October 25, 1944), respectively. And Keynes also qualifies that endorsement, in various ways, on each of those occasions. To be clear, at about the time of the 1944 Washington seminar at which, as Domar puts it, Keynes “praised functional finance to the skies” (Colander and Lan-dreth 1996, 185), in his letter to Machlup Keynes was still expressing




11. There is an intimation of the doctrine in Lerner 1940, 579–80, 590–91, and the essential principles of functional finance are asserted, albeit more or less without argument, in Lerner 1941c, 197, the latter referring also to “timid[ity]” and “appease[ment]” (195–96). Lerner 1941b—cited in Lerner 1941a, 261n, but with an incorrect title—states the doctrine fairly fully, clothed in a democratic radicalism (1941c is dated March; 1941b, May; and 1941a, June).

strong reservations (“considerable clothing of qualification”) concerning any kind of simple or mechanical policy application of the doctrine.

It is also not useful to attribute Keynes’s stance on Lerner’s doctrine to “timidity,” as Lerner (1978, 67) himself does, adding that Keynes “did not carry his conclusions all the way.” Lerner (1978, 67–68) subse-quently comments that “perhaps the ‘moderation’ is not really timidity but a practical adjustment to the general public’s allergy to logical extremes,” thereby conceding the possible relevance of a theory/practice distinc-tion. In fact, already in his first statement of the functional finance doc-trine, Lerner (1941a, 264–65) speaks of the “timidity” of “the proponents of orga nized prosperity” but without specifically accusing Keynes.11 To the extent that there is an element of truth here, a more appropriate neutral characterization of Keynes’s position is caution rather than timidity, at least partly expressing his sensibility concerning the relation between the-ory and practice. The timidity accusation, in turn, is derivative from the claim of Lerner, and others who have followed his lead, that functional finance is a logical corollary of Keynes’s own 1936 theory (evident in the above-quoted comments from Lerner 1978), so that Keynes’s resistance to unqualified acceptance of functional finance can be read as a failure to embrace the logical implications of his own system.

The opening paragraphs of Lerner 1943 speak of “the proponents of the new principles” having “not seen their full logical implications”—“all the unorthodox implications”—although it is suggested also that the silence concerning these implications might be a “tactical” choice. Hansen and Keynes are the only writers mentioned here, although neither the logical failure nor tactical silence is actually attributed to them. Subsequently, Hansen is accused of “appeasement” of conventional wisdom (43; Ler-ner’s quotation marks). Colander (1984, 1573) asserts that “‘Lernerian’ policies . . . carried the policy implications of the [Keynesian] model to their logical conclusions” (see also page 17 of Colander and Landreth’s [1996] introduction). Scitovsky (1984, 1547) characterizes functional finance as “the logical framework . . . for Keynes’s policy recommenda-tions.” Skidelsky (2000, 276) describes it as “a starkly logical application of the General Theory concepts of aggregate supply and demand to finan-




cial policy.” Lerner’s account of the Washington confrontation implies that Domar held the same view: when Keynes repudiated Lerner, “Domar, who was standing next to me, said he ought to read The General Theory” (Colander and Landreth 1996, 109; repeated in Lerner 1978, 67). This is a nice joke, but a misleading one.

Lerner’s position is not a logical corollary of Keynes’s economics of effective demand—in particular, not a logical corollary of his view that persistent unemployment is in substantial part involuntary and due to per-sistent demand deficiency (Aspromourgos 2012). Lerner’s position is one policy position that can be aligned with Keynes’s theory of activity levels. None of those who assert the logical-corollary thesis state the substantive content of Keynes’s theory, of which functional finance is supposed to be a corollary. The pursuit of full employment in Keynes’s theoretical frame-work does not entail endorsement of Lerner’s fiscal doctrine. At least this is the case so long as growth of government expenditure to ensure full-employment effective demand over time can be reconciled with budget balances that are consistent with stabilizing the public debt to GDP ratio, at some desired level, over some appropriate time horizon.

The character of this reconciliation is a subject for another article. But the feasibility of such a Keynesian policy is conceded by Lerner himself, thereby himself undermining the logical-corollary thesis that he was the first to assert:

A total demand inadequate to provide full employment can be increased . . . without unbalancing the budget . . . by a redistribution of income from the rich to the poor. . . . In fact this policy attacks the root of the general inadequacy of demand by correcting the maldistribu-tion of wealth that is responsible for it in the first place. (Lerner 1944a, 319–20; cf. 296; also 1941b, 3, 8)

The functional finance policy cannot be a logical corollary of Keynes’s theory if there is a distinct and different demand-side policy that can achieve the full-employment objective. However plausible or otherwise Lerner’s suggested alternative redistributionist policy may be, and whether or not it is the only such possible demand-side policy alternative to functional finance, so long as there is any such alternative Keynesian pol-icy, functional finance cannot be the uniquely valid approach to full-employment policy, inferable from Keynes’s theory.

It is evident enough from Keynes’s various explicit comments on func-tional finance, detailed in the previous section, that the prevalence of false




consciousness is one reason for his caution concerning simple policy application of Lerner’s idea. Although Keynes does not make explicit in any of those remarks how this might obstruct successful application (other than by dissuading policymakers from implementation), one may infer from his economic theory how adverse private sector expectations in response to a functional finance policy could reduce private spending via negative impacts on the marginal efficiency of capital or upward pressure on interest rates. The mere “fear of a Labour Government or a New Deal” can cause the former, Keynes (1936, 162) tells us. With regard to the latter, in an important passage of argument in the General Theory Keynes draws out the implications of the rate of interest becoming a free variable in his new theoretical framework, in the sense of not being determined by the requirements of saving/investment equilibrium as in orthodox theory (cf. Keynes 1937a, 250). The level of the interest rate then appears as a conven-tional magnitude, arising out of the interaction between historically condi-tioned money market expectations and monetary policy (Keynes 1936, 202–4). To get their way with respect to interest rates the monetary author-ities have to massage market sentiment into conformity with the authori-ties’ interest rate objectives (something about which Keynes expresses cau-tious optimism). This could be compromised by a rapid growth of public debt if, for reasons of false consciousness, such debt growth reduces the private sector’s preference for public debt relative to other assets. (Mone-tary financing is only possible to the extent of any increasing private sector demand for outside money; beyond that, there must be recourse to debt financing.)

This concern about false consciousness is an expression of Keynes’s sensibility toward theory versus practice—a conception of good policy practice as more than a mere mechanical application of sound theory. But it is not the totality of the theory/practice issue for Keynes. In explicit relation to Lerner, this sensibility is most fully expressed in the letter to Machlup (quoted in section 2). The distinction drawn there between “a splendid . . . idea” and “an apparatus of action” echoes a statement Keynes made in one of his responses to the reviews of the General The-ory, where he says of his theory, “It does not offer a ready-made remedy as to how . . . to maintain output at a steady optimum level. . . . I consider that my suggestions for a cure [for demand deficiency] . . . are on a differ-ent plane from the diagnosis. They . . . are subject to all sorts of special assumptions and are necessarily related to the particular conditions of the time” (1937b, 221–22). One may recall also Keynes’s (1922, v) introduc-




tion to the Cambridge Economic Handbooks series, which opens, “The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine”—and speaks of economics as an “apparatus of thought” (a phrase also used in the letter to Machlup, twenty-two years later). More generally, Keynes was a reformer seeking a path between do-nothing conservatism and revolutionary change. “Experiment” is a term he uses to capture this sen-sibility. In a 1936 BBC broadcast Keynes expresses the “strong desire and hope that we in this country may discover how to combine an unlimited readiness to experiment with changes in political and economic methods and institutions, whilst preserving traditionalism and a sort of careful conservatism, thrifty of everything which has human experience behind it, in every branch of feeling and of action” (CW 28:334; also, with regard to “experiment,” CW 9:322; 21:289; quoted in Aspromourgos 2012, 152, and Keynes 1933).

Beyond false consciousness, what are the possible practical or more fundamental difficulties, intrinsic difficulties, facing a functional finance policy? Those Keynes explicitly mentions in his various comments on Lerner’s doctrine are widening deficits, distributional ill consequences, and debt stabilizing at an undesirably high level. Lerner (1943, 49) acknowl-edges the distributional issue, albeit rather lightly, but more fully in Ler-ner 1944a, 306–7, 315, 319–22 (also in Lerner 1944b), arguing that it could be dealt with by other policy means. Keynes evidently thought it more practically or politically intractable (see also CW 22:116, 145). In his 1943 letter to Pierson, Keynes seems to doubt the Lerner proposition that under functional finance, eventually, debt will automatically stabilize (“an ever-mounting Government deficit”), although it is somewhat unclear whether this is directed at Lerner or only at Pierson’s version of Lerner’s doctrine. (Keynes appears to accept this automatic stabilization in his letter to Meade earlier the same year.) At minimum, Keynes evidently thinks that even if public debt stabilizes under Lerner’s policy, it might do so at a level undesirable for one reason or another, the one reason explicitly indicated in the letter to Pierson being the consequences for distribution (see Lerner 1943, 47, for the sort of levels at which he conjectures that debt might sta-bilize; cf. Lerner 1951, 172).

It is implausible that these were the only objective difficulties Keynes perceived. Evidence for the following possible problems that he may have had in mind can be inferred from other Keynes commentaries on public debt in the 1930s and 1940s:




1. The possibility of debt growth placing upward pressure on interest rates may be due to false consciousness. But it may also be grounded in objective potential difficulties, in particular, a rising debt/GDP ratio that implies the private sector holding more public debt relative to its income and other assets (Aspromourgos, Rees, and White 2010, 441–45). A rapid growth of debt relative to private sector aggregate income and other assets might meet resistance on the demand side of the debt market. Keynes was very much alive to the need for the debt trajectory to be managed so as to engender confidence in the debt markets that the authorities are not conducting policy in a manner that will impose upward pressure on yields, particularly for longer maturities (steepening the yield curve). This is notably evi-dent in a long sequence of documents from 1931 forward, in which he argues for public debt management by way of engineering per-sistently lower interest rates: “there is a large conventional or psy-chological element in the market rate of interest which needs firm and skilful management”; “the psychology of the investor” must be made “accustomed to a new [lower] level” of interest; policy needs to promote “a sense of confidence in what the future borrowing policy of the Treasury is going to be” (CW 21:116–17, 545, 559; also 25, 106–7, 110, 313–17, 349–52, 375–81, 401–4, 517, 523, 525–26, 539–44, 557–64, 568). In short, policy must be measured, steady, consistently pursued over time, and thereby, credible in the mar-kets. The Keynes (1936, 202–4) argument, noted above, is a distil-lation of this position.

2. In the 1943 and 1944 versions of functional finance, Lerner sup-poses that inflation is only due to excess aggregate demand, and that inflationary pressures only arise when aggregate demand exceeds full-employment supply capacity. If excess-demand inflation can occur simultaneously with involuntary unemployment, due to struc-tural imbalances, the financing issue becomes more complex, since the policymaker may then face a need to simultaneously expand and contract spending. Recall that structural unemployment was acknowledged in Lerner’s 1944 New York Times letter (section 2). He later turned his attention to a wider set of inflation possibilities (see Scitovsky 1984, 1549–50, 1556, 1561–69), but after Keynes’s death—although already intimated at the conclusion of Lerner 1946 (page 698B; see also 1940, 585). Keynes himself had a very active




policy interest in structural unemployment (see, in particular, the important statement at CW 27:354–57).

3. Public debt that is either foreign-owned (especially if foreign-currency-denominated), or a potential liability to make payments in something else other than fiat domestic currency (notably, a gold-convertible domestic currency), raises additional difficulties and constraints, primarily because it involves assets that government cannot freely create ex nihilo. As indicated above (this section), Lerner allows that foreign-held public debt compromises functional finance. These are obviously relevant considerations for Keynes, in relation to the situation of Britain before, during, and after World War II (e.g., CW 21:314, 379).

It is the first of these potential difficulties that is entirely unaddressed by Lerner.

There is one remaining issue requiring resolution. Functional finance appears to be a rather radical fiscal doctrine. Yet at the same time, it is said, quite credibly, that functional finance became a policy element of the con-ventional, textbook “neoclassical”-Keynesian synthesis of the immediate postwar decades (Colander 1984, 1573). How is the apparent radicalism to be reconciled with its incorporation into mainstream doctrine, at least for a time? The answer is that if functional finance is placed in a theoretical framework in which demand deficiency is a merely cyclical phenomenon, understood as counterbalanced by periods of excess demand, around a long-run full-employment path, it becomes a quite innocuous doctrine. Deficits in slumps then can be offset by surpluses in booms. (Keynes him-self had other reasons for also being averse to short-run, discretionary, countercyclical fiscal policy [Aspromourgos 2012, 150–51, 155].) There is no sign of such a “neoclassical” view in Lerner 1943 (see especially page 42), and Keynes, in the letter to Meade, had no doubt that the article was concerned with “a chronic deficiency of purchasing power rather than an intermittent one.” On the other hand, the neoclassical view is precisely how Scitovsky (1984, 1560) interprets Lerner’s position (also Colander 1984, 1573n2). The least that can be said is that Lerner provided consider-able commentary—for instance, with respect to the cycle, and nominal wage and price stickiness—to facilitate such an interpretation (e.g., 1941a, 257–58; 1944a, 285–301; 1951, 204–6; 1978, 63–67; Colander and Lan-dreth 1996, 93–95, 100–101). Against this, Lerner (1951, 314) explicitly repudiates this interpretation.




12. For factually based interpretations of Keynes’s general position on fiscal policy, in the framework of current versus capital budgeting, see Kregel 1985, Brown-Collier and Collier 1995, and Clarke 1998. By “deficit financing,” Keynes (e.g., 1936, 128n; CW 27:406) means an excess of recurrent spending over recurrent revenues. He also intended debt issued for public capital expenditure to be partly serviced by user charges (CW 27:224–25, 319–20, 405–6).

4. Conclusion

We have characterized Keynes’s position on public debt as cautious, as against Lerner’s accusation of timidity. In relation to theory versus prac-tice, Keynes’s stance might also be described as prudent. But although he was more cautious than Lerner about public debt trajectories, Keynes was not a debt conservative. Lerner had the recollection that in the 1943 con-frontation Keynes said that “the national debt can’t keep on growing” (Colander and Landreth 1996, 109). And it is the case that Keynes in pol-icy deliberations in the 1940s endorses as a general (but not completely inflexible) principle that public debt should be used only to finance capital expenditures.12 But notwithstanding Lerner’s recollection and this general principle, in a 1944 note Keynes appears unconcerned about a growth of “dead-weight debt” (debt issued to finance recurrent expenditures) that is “neither large in itself nor out of proportion to the growth of the national income” (CW 27:366). He also affirmed many times that the endogeneity of the budget balance with respect to activity levels makes debt-financed expenditure at least partly self-correcting, via the consequent increase in tax revenues and reduction in other outlays (Keynes 1936, 98; CW 9:347–48; 21:149–50, 153, 183–84, 335–37, 510; 22:377–78; 27:366–67). In summary, one could say that from the standpoint of Keynes’s policy sensibility, Lerner was guilty of the so-called Ricardian vice (Schumpeter 1954, 473; notwithstanding that Schumpeter, foolishly, ascribes it to Keynes himself, as well as to Ricardo).

A sense of an unwillingness on the part of Lerner to bend the applica-tion of theory to practice, or of a certain temperamental unsuitability to practical policy design, is suggested by Samuelson: “Lerner was a bril-liant mind, and only his lack of gravitas limited his influence on actual policy” (Colander and Landreth 1996, 177). Something of the same per-ception is also evident in comments of Domar—“Lerner was famous for his outlandish schemes”—Domar citing Lerner’s proposal during the war to allocate military resources among field commanders via a price mecha-nism (discussed also by Scitovsky 1984, 1566–67) and describing Mus-grave’s reaction to functional finance: “He thought that it might be all right for Lerner to utter such heresies, but not for the more reasonable and



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practically inclined people” (Colander and Landreth 1996, 186). A similar sense is conveyed in the comment of Keynes to Robbins, about a lack of “judgment and intuition” sometimes leading Lerner into “preposterous conclusions” (quoted more fully in section 2). Scitovsky (1984, 1548–50; also 1552, 1561, 1565, 1569) notes that many “looked upon him as a crank”; to “contemporary economists, . . . most of his policy recommen-dations looked like gimmicks”; “he considered . . . the translation of logi-cal rules into practical policies the task of politicians, not economists”—and Scitovsky speaks of “his lack of interest in and limited knowledge of how real economies actually operate,” making Lerner “blind to political realities,” his “overly simple picture of economic reality” leading him to prescribe “overly simple cures for its woes.” Colander (1984, 1573) notes Keynes’s “deep understanding of the political process, a burden under which Lerner did not labor.” Keynes’s more considered views on debt, taken altogether, suggest the conclusion that policy management of the psychology of the debt market (or equivalently, the yield curve) was the key difficulty that Lerner did not face.

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